A New Road To Serfdom

Senator Elizabeth Warren’s Accountable Capitalism Act reflects her total ignorance of capitalism, how a market economy works, and the power of incentives. For someone who was on the faculty at Harvard before becoming a senator, she obviously never interacted with any of the world class economists who are on its faculty—Larry Summers, Martin Feldstein, Richard Cooper, Greg Mankiw, and Dale Jorgenson for example. They might have informed her that her ideas have been discredited by history.

If she wasn’t a senator, her proposal would be widely ridiculed. Since she is, her wooden headed notions of how to improve corporate performance have to be taken seriously, in case democrats capture Congress and the White House in 2020. In the late 1970s, one of her predecessors, Teddy Kennedy, introduced a bill to break up oil companies that came within four votes of passing the Senate. Her mindset reflects the growing enthrallment with an illusion of democratic socialism that is being embraced by the far-left wing of the democrat party and a large number of millennials. Democratic socialism is a dream; not a real economic and political system. Where socialism has been adopted, political freedom has been reduced and income inequality increased.

In the case of Senator Warren and to paraphrase Mark Twain, we should not worry about all that she doesn’t know but we should be seriously troubled by all the things she knows that just aren’t true. She believes that the search for profit is ruining capitalism and that instead of just being accountable to shareholders who put their capital at risk by investing in corporations, she wants them accountable also to all the people. Her way of achieving this is to require all corporations with revenue—not profits—of more than $1 billion to be federally chartered with bureaucrats in the Commerce Department overseeing and regulating them. Where would she find the equivalent of angels instead of bureaucrats to make sure that boards of directors and executives take into account the interests of workers and local communities in the decisions they make. How would those interests be determined?

She would also require that 40% of boards be filled with workers whose incentives would be anything but long term and strategic.

All of these changes are supposed to come at no cost. According to Matthew Yglesias in a Vox article, “Warren’s bill would fundamentally restructure corporate governance and redistribute trillions of dollars from rich executives and shareholders to the middle class – without costing a dime.” In evaluating this assertion and the Senator’s bill, Don Boudreaux, a professor of economics at George Mason University, made what should be an obvious point, “Whenever the government commands you to do that which you otherwise would not do, it imposes on you a cost, … And this cost neither disappears nor is rendered less real simply because the specific manner in which it is imposed results in it not appearing as a debit entry on the accounting artifact that we call the U.S. government’s budget.” He also observed that Yglesias has taken a different perspective in commenting that zoning regulations and a NIMBY philosophy stall housing development. “When too many people have regulatory veto power over market decisions, stagnation is the outcome, and it ends up hurting any number of people.” He obviously is not troubled by cognitive dissonance.

Senator Warren wants to solve a problem that generally doesn’t exist. In doing that unintended consequences would dominate. Her economist colleagues at Harvard could have informed her that when companies reinvest profits, they are benefitting workers because investments that increase productivity, lead to wage growth and acreate new jobs. And, buy backs don’t just enrich the ultra-wealthy, they enrich workers who have shares in the company and who have retirement funds, and IRAs. Buy backs are also an efficient way to shift money from firms who have an excess to those that don’t since buy back profits are generally reinvested.

In a competitive environment, companies reward workers appropriately to reduce the risk losing them and have compensation packages to attract workers to fill new jobs.

While making and increasing profits is a corporation’s first priority, it is not their only one as has been demonstrated by a simple look at what leading companies do in terms of R&D, community involvement, providing for worker education and other benefits, and their support for social issues. Once corporate decisions become more centralized in Washington, political and economic freedom will be victims because the concentration of power always leads to the erosion of political freedom. As Milton Friedman observed in Capitalism and Freedom,” When the government confiscates wealth to achieve her desired redistribution, the incentive to create more wealth will be reduced. Friedman also made the point that the forced distribution of income, government has been doing more harm … “the justification of government intervention in terms of alleged defects of the private enterprise system … are themselves the creation of government, big and small.”

Senator Warren and her other true believers in utopian illusions would lead us down Friedrich Hayek’s Road to Serfdom. Almost 80 years ago he warned, ”the most important change which extensive government control produces is a psychological change, an alteration in the character of the people. This is necessarily a slow affair, a process whch extends… over …generations.”